If you are a new entrepreneur or are searching for a business to start or buy, you might overlook this simple fact. If so, you are making a huge mistake. To make the most money as a business owner, you want a business model that has built-in recurring revenues.
Examples of Recurring Revenue Business Models
Here are a couple of examples of recurring revenue businesses.
One friend of mine sells telecommunications services. In short, his company sells bandwidth to companies. The offerings include T1 lines, T3 lines, OC3 lines, OC12 lines and other internet access and point to point telecom offerings.
His business is a reseller of telecom services from big companies like AT&T and MCI. He doesn't have the massive overhead that those companies have. He just sells their services and offers a small amount of first-call support services.
The business has recurring revenues because whenever he sells, say, a T1 line, my friend gets a commission on every single payment the buyer makes. In other words, it's not a one-time fee. Rather, it's an annuity. As long as the customer keeps that T1, even if it's for 10 years, my friend is making money. He only had to sell the deal once, the customer typically renews every year, and he just watches as MCI and AT&T transfer money into his bank account.
That's the beauty of a recurring revenue business. In essence, you earn money now for work you did in the past.
Here's another one. Another business acquaintance of mine sells health insurance to companies. At any given time, he has maybe 50 companies with an average of 40 employees each. I'm not sure exactly what an average health premium is for his clients but let's guess that it's $500 per month. For having sold the health insurance plan, he gets 4% of every premium payment made to the health insurance company.
So, do the math. He's making 50 X 40 X $500 x 12 X .04 per year. That works out to top line revenues of $480,000. Not bad.
He has one employee on staff…a troubleshooter who handles those situations when an employee of one his clients runs into an issue with a health insurance claim. He also has rent expenses on a small office. All in, I'm guessing he's pulling in $300,000 net before taxes worst case.
If he left the country for a year to take a long vacation, he might lose a few clients. But his able assistant could handle most of the service issues. He'd still be receiving revenues in the form of commission payments. In other words, he'd be benefiting from the recurring revenues related to work he did years ago.
Alternatives to Recurring Revenue Business Models
The mistake that many new entrepreneurs make is that they don't figure out how to build a recurring revenue business.
Instead, they earn only as much money as they deserve based on very recent efforts.
This is the taxi company business model. You get a fare, drive them, and get paid. Now, to make more money, you need to find a new fare.
There are no rewards for what you do long ago. There's no cumulative building up of revenues. It is always "What have you done for me lately?" from customers. No new sale, no new revenues.
Entrepreneurs on this track are on a treadmill. If they get off the treadmill, they stop making money.
Always Look for Recurring Revenues
The key takeaway from this article is that owning a business is not a generic concept. Every business out there has different dynamics to it, which in aggregate amount to a business model.
Some business models are better than others. As an entrepreneur, you need to evaluate the business models that are available to you and choose the most profitable…offering the maximum reward for the minimum effort and risk.
Take our word for it. The best business to buy or start will be one that has recurring revenues built into the business model. Without that, you can do OK but you will always be on the treadmill. In that case, the business owns you instead of visa versa.
This article originally appeared in "Resources for Entrepreneurs" on www.gaebler.com. Click here for the original.
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If you live in Tucson or Southern Arizona, and are thinking about buying a business, keep in mind that there are many home based businesses that require no or little money out of your pocket to get started. The only out of pocket expense that a company should actually be asking for is for a background check which will typically cost between $15 and $30 in most states.
Many companies will pay for this expense but there are a few that will ask for that money in advance before any hiring is considered. With the amount of companies that will employ someone to work from home it has become a win-win situation for both parties. With the economy taking a turn for the worst over the past few years, it has been up to many individuals to start a home-based business due to many factors including losing their job, a cut in pay and even needing to help make ends meet in their households. Depending on the nature of the business, some of these home based businesses may actually turn out to be businesses that you could sell. E-commerce and software related businesses come to mind, as do certain kinds of distributorships.
The best way to find an at home business is to take a look at your interests to see what you enjoy doing. If you enjoy making crafts, a craft business would be ideal for you and can be sold online, in a local craft store or even during the holidays at a Holiday Craft Bazaar. Another great idea for a home business is baking. If you enjoy baking for a hobby or just in general, this could be a great idea for you. With adequate vision and ambition, such businesses could be extended into out of home businesses as well, if that were your objective.
Before starting up any type of food business, home-based or otherwise, you will need to check with your local and state government to have them specify the instructions for having a cooking business. In many states you can do this from home but there are a few states that require you to have a commercial business and license to be able to sell your products to consumers. There is also a requirement about listing all of your ingredients on the label of the item as well your information of where you are making the items and your contact information.
Over the past few years that have been a few Virtual Assistant companies that have been established and they have been up and coming in the job market as well. Being a Virtual Assistant gives you the opportunity to work from home by answering telephone calls, typing notes, data entry, or providing higher order services such as html programming, accounting or even legal services along with many other tasks that are needed by the client. This is type of business may represent great opportunity for those individuals that have a great phone voice, have a background in selling both themselves as well as the client and is typically a flexible schedule when the kids are in school, which is great for a stay at home mom or dad that is looking for an income.
There are a few Arizona home based businesses for sale that have been proven to be very profitable over the past years. A home based business can be for sale for many reasons including the owner may be ready to retire and want out of the business, the owner may feel that if the business is a relocatable business for sale it may do better in a different state or marketing area of the country and the owner may stay on to help teach you the ropes of the business.
The at home business aspect in catching on all over the United States and has become very profitable for many individuals. If you have a great interest in something, and you feel that you are an expert at what you do, then it may be a good idea for the next home based business adventure. Try to think through your end game for such a business right from the start, in other words, what will happen to this business when you know long want to run it? Will it be saleable? Will it have created value, or simply provided you an income along the way. Both are fine, it just depends what your long term objectives are.
If it is your goal to create something that an investor would find valuable and could run without you, then a business broker can help advise you on the types of criteria your business should be able to satisfy in order to command value on the market.
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